| Summary: | Does related lending have positive or negative effects on the development of banking systems? We analyze a unique cross-country data set covering 74 countries from 1990 to 2007, and find that related lending, on average, does not have any effect on the growth of credit. We do find, however, that there are conditional relationships: related lending tends to retard the growth of banking systems when rule of law is weak, whereas it tends to promote the growth of banking systems when rule of law is strong. We also find that related lending appears to be associated with looting when banks are owned by non-financial firms, but that it does not do so when non-financial firms are owned by banks. Our results indicate that whether related lending is positive or pernicious depends critically on the institutional context in which it takes place; there is no single "best policy" regarding related lending. These findings are robust to alternative specifications, including IV regressions.
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